Company law will always be complicated to understand, but, certainly each and every provision of company law is backed by sound logic. It is imperative on the part of companies to understand the company law, the requirements under company law and the complications too. If good counsel has not taken on important issues, the company may be in trouble unnecessarily. There are certain issues in the course of managing a company which requires greater concentration. An application against a company seeking to investigate into the affairs of company, the winding up application against the company and an application seeking remedial and preventive measures against the majority or the company etc. are to be handled by the Company carefully. While it is very rare to see an investigation into the affairs of the Company, it is very very common to see a preventive measure against a company when a minority files an application under section 397/398 of Companies Act, 1956. On the same lines, a company may have to face winding-up proceedings very frequently.
With my experience and exposure to company litigation, I do strongly feel that every company should be very careful when a proceeding is sought to be initiated against it.
But, at times, on flimsy grounds, the Company may have to face winding-up proceedings. The Act enumerates certain grounds on which a winding-up application can be filed against a company. Among the grounds provided under the Act, I feel the ground of “inability to pay its debt” is very dangerous. Because, it is very difficult to construe the word “inability” and conclude the issue. The company may not have any tangible assets and might not have secured good profits, but, it does not mean that the company is unable to pay its debt. A company may have goodwill and good credit rating despite not making good profits in some years. But, what the act says is that when a person demands the company to pay his debt and when the company does not meet the demand, then, that person can approach court of law to wind-up the company on the ground that the company is unable to pay its debt. The company may have some counter claim, some good reason for not paying the debt and the company may be in the course of initiating proceedings. Based on technicalities and ineffective handling of the issue, winding-up order may be passed against a company. The Company may have to face some consequences with the winding up order against it. Because, it is general perception that the company will be wound-up only when it is not in a good position or financially sick. But, its not technically true. A company may resort to voluntary winding up or a winding up application can be filed against the company on the ground that the reports are not filed as provided. But, public will see the issue of winding-up from a different angle.
As such, the company should be very very careful in dealing with winding-up issues.
I have seen practically where the company suffers great loss and faces so many difficulties on technicalities. Every Company should concentrate well on complying with the provisions of companies act and the company litigation against it. A small brief is given hereunder to understand as to what is winding-up.
How to understand the issue of winding up?
Section 425 of Companies Act, 1956, deal with the modes of winding up. The section says that a company can be wound up either by the Tribunal or by the company voluntarily. The first question to be considered is as to what is winding up. It is nothing but winding up the affairs of the company. In accordance with the memorandum and articles and in accordance with the provisions of the Act, the company does its business managed by the professionals called directors, secretaries and managers. While it is for the majority stake holders logically to run the company as they wish, there should be regulations while running the company both in the interest of members and creditors on one part and the public interest on the other. The members of the company are always considered as internal part of the company being the contributories liable to contribute to the assets of the company during liquidation. Though, the creditors are provided with certain rights against the company including the right to file winding up petition etc. in accordance with law, normally excepting their interest, they will in no way directly related to the affairs of the company or its business. Thus, the members having every right to direct the company, the creditors being the interested parties and the government etc. statutory bodies representing the public at large, are involved when it comes to winding up of the company. Thus, either the members or creditors can go for winding up of the company in accordance with the provisions of the Act. Again, for winding up, either the members or the creditors can go ahead with the winding up of the company voluntary for which separate procedure is prescribed under the Act. Otherwise, the Tribunal, on certain grounds, can wind up the company. On one hand, there are provisions like revival and rehabilitation of sick industrial companies and provision for revival even during the liquidation, and one the other hand, on certain grounds the Tribunal will wind up the company. Thus, it can’t be said that the company should not be wound up and always remedial measures to be resorted to without winding up the company. On the other hand, when it is impossible to put the company on track and the interested parties are not towards revival and rehabilitation, then, there can be no option for the company except to wind up the company. Thus, once the company is wound up, it means, literally, the affairs of the company are stalled and the liquidation starts. Putting an end to the affairs of the company by settling the dues and realizing the amounts in accordance with law is liquidation. If the entire liquidation is over, then, the company will get dissolved and literally loses its identity as a legal entity.